DIAMOND OFFSHORE DRILLING, INC. - Quarter Report: 2020 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2020

OR

For the transition period from               to              

Commission file number 1-13926

DIAMOND OFFSHORE DRILLING, INC.

(Exact name of registrant as specified in its charter)

15415 Katy Freeway

Houston, Texas  

77094

(Address of principal executive offices)

(Zip Code)

(281) 492-5300

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

*The registrant’s Common Stock began trading on the OTC Pink Open Market on April 28, 2020 under the symbol “DOFSQ.”

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   ☒No    ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes   ☒No    ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   ☐ No   ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of April 29, 2020 Common stock, $0.01 par value per share   138,050,347 shares

DIAMOND OFFSHORE DRILLING, INC.

TABLE OF CONTENTS FOR FORM 10-Q

QUARTER ENDED MARCH 31, 2020

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PART I.  FINANCIAL INFORMATION

ITEM 1. Financial Statements.

DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)

The accompanying notes are an integral part of the condensed consolidated financial statements.

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DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

The accompanying notes are an integral part of the condensed consolidated financial statements.

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DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited)

(In thousands)

The accompanying notes are an integral part of the condensed consolidated financial statements.

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DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited)

(In thousands, except number of shares)

The accompanying notes are an integral part of the condensed consolidated financial statements.

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DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

The accompanying notes are an integral part of the condensed consolidated financial statements.

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DIAMOND OFFSHORE DRILLING, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. General Information

The unaudited condensed consolidated financial statements of Diamond Offshore Drilling, Inc. and subsidiaries, which we refer to as “Diamond Offshore,” “we,” “us” or “our,” should be read in conjunction with our Annual Report on Form 10-K/A for the year ended December 31, 2019 (File No. 1-13926).

As of May 1, 2020, Loews Corporation owned approximately 53% of the outstanding shares of our common stock.

Interim Financial Information

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S.”) (“GAAP”), for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission. Accordingly, pursuant to such rules and regulations, they do not include all disclosures required by GAAP for annual financial statements. The condensed consolidated financial information has not been audited but, in the opinion of management, includes all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of Diamond Offshore’s condensed consolidated balance sheets, statements of operations, statements of comprehensive loss, statements of stockholders’ equity and statements of cash flows at the dates and for the periods indicated. Results of operations for interim periods are not necessarily indicative of results of operations for the respective full years.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimated.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update, or ASU, No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 replaces the incurred loss impairment methodology under previous GAAP by requiring entities to measure credit losses of certain financial assets, including trade receivables, utilizing a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

We adopted ASU 2016-13 and its related amendments (collectively, “CECL”) effective January 1, 2020, by recognizing a cumulative-effect adjustment which was not material to our unaudited condensed consolidated financial statements. CECL has been applied prospectively and therefore, prior periods have not been adjusted.  See Notes 5 and 7.

Asset Held for Sale

We reported the $1.0 million net book value of the Ocean Confidence, a previously impaired semisubmersible rig that was cold stacked in 2015, as “Asset held for sale” in our Consolidated Balance Sheets at December 31, 2019.  The rig was sold in February 2020 for a net pre-tax gain of $3.5 million.

2. Going Concern

As a result of the prolonged downturn in the offshore contract drilling industry, combined with the added economic uncertainty in the global energy markets resulting from a further decline in energy prices and the COVID-19 pandemic and efforts to mitigate the spread of the virus, we have reported a net loss of $861.9 million, inclusive of a $774.0 million impairment charge, for the three months ended March 31, 2020. As of March 31, 2020, we had an aggregate of approximately $2.4 billion in senior notes and borrowings under our revolving credit facility outstanding with stated maturities at various times from 2023 through 2043, of which an aggregate of $436.0 million was borrowed under our revolving credit facility. As described in Note 13 “Subsequent Events,” on April 26, 2020,

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Diamond Offshore Drilling, Inc. (the  “Company”) and certain of its direct and indirect subsidiaries (together with the Company, the “Debtors”) filed voluntary petitions for relief under chapter 11 of title 11 of the United States Code (the “Chapter 11 Cases”) in the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”). As a result of the filing of the Chapter 11 Cases, the principal and interest due under our outstanding senior notes and revolving credit facility became immediately due and payable and have been presented as “Current maturities of long-term debt” in our unaudited Condensed Consolidated Balance Sheet at March 31, 2020. However, any efforts to enforce such payment obligations with respect to our senior notes and revolving credit facility are automatically stayed as a result of the filing of the Chapter 11 Cases. We have projected that we will not have sufficient cash on hand or available liquidity to repay such outstanding debt. These conditions and events raise substantial doubt over our ability to continue as a going concern for twelve months after the date our financial statements are issued.  

Financial information in this report has been prepared on the basis that we will continue as a going concern, which presumes that we will be able to realize our assets and discharge our liabilities in the normal course of business as they come due. Financial information in this report does not reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and balance sheet classifications that would be necessary if we were unable to realize our assets and settle our liabilities as a going concern in the normal course of operations. Such adjustments could be material.  Our long-term liquidity requirements, the adequacy of capital resources and ability to continue as a going concern are difficult to predict at this time. If our future sources of liquidity are insufficient, we could face substantial liquidity constraints and be unable to continue as a going concern and will likely be required to significantly reduce, delay or eliminate capital expenditures, implement further cost reductions, or seek other financing alternatives.

Although we anticipate that the Chapter 11 Cases will help address our liquidity concerns, the approval of a plan of reorganization is not within our control and uncertainty remains over the Bankruptcy Court's approval of a plan of reorganization. As such we have concluded that substantial doubt continues to exist about our ability to continue as a going concern.

3. Revenue from Contracts with Customers

The activities that primarily drive the revenue earned from our contract drilling services include (i) providing a drilling rig and the crew and supplies necessary to operate the rig, (ii) mobilizing and demobilizing the rig to and from the drill site and (iii) performing rig preparation activities and/or modifications required for the contract. Consideration received for performing these activities may consist of dayrate drilling revenue, mobilization and demobilization revenue, contract preparation revenue and reimbursement revenue. We account for these integrated services provided within our drilling contracts as a single performance obligation satisfied over time and comprised of a series of distinct time increments in which we provide drilling services.

Consideration for activities that are not distinct within the context of our contracts and do not correspond to a distinct time increment within the contract term are allocated across the single performance obligation and recognized ratably over the initial term of the contract (which is the period we estimate to be benefited from the corresponding activities and generally ranges from two to 60 months). Such consideration may include mobilization, demobilization, contract preparation and capital modification revenue that is stipulated in our drilling contracts. Consideration for activities that correspond to a distinct time increment within the contract term is recognized in the period when the services are performed. The total transaction price is determined for each individual contract by estimating both fixed and variable consideration expected to be earned over the term of the contract.  

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Contract Balances

The following table provides information about receivables, contract assets and contract liabilities from our contracts with customers (in thousands):

Significant changes in the contract assets and the contract liabilities balances during the period are as follows (in thousands):  

Transaction Price Allocated to Remaining Performance Obligations

The following table reflects the specified types of revenue expected to be recognized in the future related to unsatisfied performance obligations as of March 31, 2020 (in thousands):

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The revenue included above consists of expected fixed mobilization and upgrade revenue for both wholly and partially unsatisfied performance obligations, as well as expected variable mobilization and upgrade revenue for partially unsatisfied performance obligations, which has been estimated for purposes of allocating across the entire corresponding performance obligations. Revenue expected to be recognized in the future related to the blending of rates when a contract has operating dayrates that decrease over the initial contract term is also included.  The amounts are derived from the specific terms within drilling contracts that contain such provisions, and the expected timing for recognition of such revenue is based on the estimated start date and duration of each respective contract based on information known at March 31, 2020. The actual timing of recognition of such amounts may vary due to factors outside of our control. We have applied the disclosure practical expedient in ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and its related amendments, and have not included estimated variable consideration related to wholly unsatisfied performance obligations or to distinct future time increments within our contracts, including dayrate revenue.

4. Impairment of Assets

2020 Evaluation. During the first quarter of 2020, the business climate in which we operate experienced a significant adverse change, primarily as a result of the market impacts of the oil price war between Saudi Arabia and Russia and regulatory, market and commercial challenges arising as a result of the COVID-19 pandemic and efforts to mitigate the spread of the virus, both of which resulted in a dramatic decline in oil prices. At March 31, 2020, we evaluated five of our drilling rigs that had indicators of impairment.  Based on our assumptions and analysis at that time, we determined that the carrying value of four of these rigs was impaired (we collectively refer to these four rigs as the 2020 Impaired Rigs).

We estimated the fair values of the 2020 Impaired Rigs using an income approach, whereby the fair value of each rig was estimated based on a calculation of the rig’s future net cash flows. These calculations utilized significant unobservable inputs, including management’s assumptions related to estimated dayrate revenue, rig utilization, estimated capital expenditures, repair and regulatory survey costs, as well as estimated proceeds that may be received on ultimate disposition of each rig. Our fair value estimates were representative of Level 3 fair value measurements due to the significant level of estimation involved and the lack of transparency as to the inputs used.  

We recorded aggregate impairments of $774.0 million for the three months ended March 31, 2020 related to our 2020 Impaired Rigs. See Note 7.

We evaluate our property and equipment for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If market fundamentals in the offshore oil and gas industry deteriorate further or a market recovery is further delayed, we may be required to recognize additional impairment charges in future periods. See Note 13.

5. Supplemental Financial Information

Condensed Consolidated Balance Sheets Information

Accounts receivable, net of allowance for credit losses, consist of the following (in thousands):

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Prepaid expenses and other current assets consist of the following (in thousands):

Accrued liabilities consist of the following (in thousands):

Condensed Consolidated Statements of Cash Flows Information

Noncash investing activities excluded from the unaudited Condensed Consolidated Statements of Cash Flows and other supplemental cash flow information is as follows (in thousands):  

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6. Loss Per Share

We present basic and diluted net loss per share on our unaudited Condensed Consolidated Statements of Operations.  Basic net loss per share excludes dilution and is computed by dividing net loss by the weighted-average number of shares of common stock outstanding for the period.  For all periods in which we experience a net loss, all shares of common stock issuable upon exercise of outstanding stock appreciation rights and vesting of outstanding restricted stock units have been excluded from the calculation of weighted-average shares because their inclusion would be antidilutive.

The following table sets forth the stock-based awards excluded from the computations of diluted loss per share (in thousands).  

7. Financial Instruments and Fair Value Disclosures

Concentrations of Credit Risk and Allowance for Credit Losses

Our credit risk corresponds primarily to trade receivables. Since the market for our services is the offshore oil and gas industry, our customer base consists primarily of major and independent oil and gas companies, as well as government-owned oil companies. At March 31, 2020, we believe that we have potentially significant concentrations of credit risk due to the number of rigs we currently have contracted and our limited number of customers, as some of our customers have contracted for multiple rigs.

In general, before working for a customer with whom we have not had a prior business relationship and/or whose financial stability may be uncertain, we perform a credit review on that customer, including a review of credit ratings and financial statements. Based on that credit review, we may require that the customer have a bank issue a letter of credit on their behalf, prepay for the services in advance or provide other credit enhancements. At March 31, 2020, we have not required customers to pay for services in advance, nor have we required credit enhancements from our customers. We have historically used the specific identification method to identify and reserve for uncollectible accounts. The amounts reserved for uncollectible accounts in previous periods have not been significant, individually or in comparison to our total revenues. At March 31, 2020, $6.9 million in trade receivables were considered past due by 30 days or more, of which $5.5 million were fully reserved for in previous years and the remaining $1.4 million were less than 90 days past due and considered collectible.

Pursuant to ASU 2016-13, we have reviewed our historical credit loss experience over a look-back period of ten years, which we deem to be representative of both up-turns and down-cycles in the offshore drilling industry.  Based on this review, we developed a credit loss factor using a weighted-average ratio of our actual credit losses to revenues during the look-back period. In addition, we also considered current and future anticipated economic conditions in determining our credit loss factor, including crude oil prices and liquidity of credit markets. In applying the requirements of CECL, we segregated our trade receivables into three credit loss risk pools based on customer credit ratings, each of which represents a tier of increasing credit risk. We calculated a credit loss factor based on historical loss rate information and then applied a multiple of our credit loss factor to each of these risk pools, considering the impact of current and future economic information and the level of risk associated with these pools, to calculate our current estimate of credit losses. Trade receivables that are fully covered by allowances for credit losses are excluded from these risk pools for purposes of calculating our current estimate of credit losses. 

For purposes of calculating our current estimate of credit losses at January 1, 2020 and March 31, 2020, all trade receivables were deemed to be in a single risk pool based on their credit ratings at each respective period.  Our current estimate of credit losses under CECL was $0.3 million for the three months ended March 31, 2020, all of which related to the cumulative adjustment recorded for the initial adoption of ASU 2016-13. Due to immateriality, the cumulative adjustment was recorded in “Contract drilling expense, excluding depreciation” in our unaudited

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Condensed Consolidated Statements of Operations instead of in opening retained earnings as prescribed in ASU 2016-13. Our total allowance for credit losses was $5.8 million and $5.5 million at March 31, 2020 and December 31, 2019, respectively. See Notes 1 and 5.

Fair Values

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by GAAP requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

Certain of our assets and liabilities are required to be measured at fair value on a recurring basis in accordance with GAAP. In addition, certain assets and liabilities may be recorded at fair value on a nonrecurring basis. Generally, we record assets at fair value on a nonrecurring basis as a result of impairment charges. We recorded an impairment charge related to four of our drilling rigs, which were measured at fair value on a nonrecurring basis at March 31, 2020 and have presented the aggregate loss in “Impairment of assets” in our unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2020. Assets measured at fair value are summarized below (in thousands).

⁽¹⁾ Represents the aggregate impairment charge recognized during the three months ended March 31, 2020 and corresponding book value as of March 31, 2020 of the four semisubmersible rigs, which were written down to their estimated fair values.  See Note 4.

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 We believe that the carrying amounts of our other financial assets and liabilities (excluding our senior notes), which are not measured at fair value in our unaudited Condensed Consolidated Balance Sheets, approximate fair value based on the following assumptions:

Our senior notes are not measured at fair value; however, under the GAAP fair value hierarchy, our senior notes would be considered Level 2 liabilities. The fair value of our senior notes was derived using a third-party pricing service at March 31, 2020 and December 31, 2019. We perform control procedures over information we obtain from pricing services and brokers to test whether prices received represent a reasonable estimate of fair value. These procedures include the review of pricing service or broker pricing methodologies and comparing fair value estimates to actual trade activity executed in the market for these instruments occurring generally within a 10-day period of the report date.

Fair values and related carrying values of our senior notes are shown below (in millions).

We have estimated the fair value amounts by using appropriate valuation methodologies and information available to management. Considerable judgment is required in developing these estimates, and accordingly, no assurance can be given that the estimated values are indicative of the amounts that would be realized in a free market exchange.

8. Drilling and Other Property and Equipment

Cost and accumulated depreciation of drilling and other property and equipment are summarized as follows (in thousands):

During the three months ended March 31, 2020, we recorded an aggregate impairment charge of $774.0 million, to write down four of our drilling rigs with indicators of impairment to their estimated fair values. See Notes 4 and 7.  

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9. Credit Agreements and Credit Ratings

Credit Agreements

Effective March 17, 2020, we terminated our $225.0 million revolving credit agreement, which was scheduled to mature on October 22, 2020.  At the time of termination, there were no borrowings outstanding under the facility. We did not incur any early termination penalties in connection with the termination and wrote off $0.5 million in deferred arrangement fees associated with the facility.

In March 2020, we borrowed $436.0 million under our $950.0 million senior 5-year revolving credit agreement, or Credit Agreement, which was entered into on October 2, 2018. The weighted average interest rate on the combined borrowings at March 31, 2020 was 5.32%. Borrowings under the Credit Agreement mature at the earliest of the maturity of the Credit Agreement on October 2, 2023, termination of the commitments or acceleration upon an event of default. The filing of the Chapter 11 Cases constituted an event of default and the principal and interest due under the Credit Agreement became immediately due and payable and therefore ,have been presented as “Current maturities of long-term debt” in our unaudited Condensed Consolidated Balance Sheet at March 31, 2020. See Note 13 “Subsequent Events.”

 In January 2020, a $6.0 million financial letter of credit was issued under the Credit Agreement in support of a previously issued surety bond.  See Note 13 “Subsequent Events.”

Credit Ratings

On March 9, 2020, Moody’s Investor Services (“Moody’s), downgraded our current corporate credit rating to Caa1 from B2 and our current senior unsecured notes credit rating to Caa2 from B3.  On April 16, 2020, Moody’s further downgraded both our corporate credit rating and our current senior unsecured notes credit rating to Ca. And, on April 27, 2020, Moody’s downgraded our corporate credit rating to D. The rating outlook from Moody’s is negative.

Additionally, on April 16, 2020, S&P Global Ratings (“S&P”) downgraded our corporate and senior unsecured notes credit ratings to CC from CCC+ and our Credit Agreement rating to CC from B-. On April 24, 2020, S&P lowered our corporate credit rating and all issue-level credit ratings to D. Our rating outlook from S&P has been designated as not meaningful.

Our current credit ratings are below investment grade and could raise our cost of financing. Consequently, we may not be able to issue additional debt in amounts and/or with terms that we consider to be reasonable. These ratings could limit our ability to pursue other business opportunities.

10. Commitments and Contingencies

Various claims have been filed against us in the ordinary course of business, including claims by offshore workers alleging personal injuries. With respect to each claim or exposure, we have made an assessment, in accordance with GAAP, of the probability that the resolution of the matter would ultimately result in a loss. When we determine that an unfavorable resolution of a matter is probable and such amount of loss can be determined, we record a liability for the amount of the estimated loss at the time that both of these criteria are met. Our management believes that we have recorded adequate accruals for any liabilities that may reasonably be expected to result from these claims.

Asbestos Litigation

We are one of several unrelated defendants in lawsuits filed in Louisiana state courts alleging that defendants manufactured, distributed or utilized drilling mud containing asbestos and, in our case, allowed such drilling mud to have been utilized aboard our drilling rigs. The plaintiffs seek, among other things, an award of unspecified compensatory and punitive damages. The manufacture and use of asbestos-containing drilling mud had already ceased before we acquired any of the drilling rigs addressed in these lawsuits. We believe that we are not liable for the damages asserted in the lawsuits pursuant to the terms of our 1989 asset purchase agreement with Diamond M Corporation. We are unable to estimate our potential exposure, if any, to these lawsuits at this time but do not believe that our ultimate liability, if any, resulting from this litigation will have a material effect on our consolidated financial condition, results of operations or cash flows.

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Non-Income Tax and Related Claims

We have received assessments related to, or otherwise have exposure to, non-income tax items such as sales-and-use tax, value-added tax, ad valorem tax, custom duties, and other similar taxes in various taxing jurisdictions. We have determined that we have a probable loss for these taxes and the related penalties and interest and, accordingly, have recorded a $12.7 million and $16.1 million liability at March 31, 2020 and December 31, 2019, respectively. We intend to defend these matters vigorously; however, the ultimate outcome of these assessments and exposures could result in additional taxes, interest and penalties for which the fully assessed amounts would have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

Other Litigation

We have been named in various other claims, lawsuits or threatened actions that are incidental to the ordinary course of our business, including a claim by one of our customers in Brazil, Petróleo Brasileiro S.A., or Petrobras, that it will seek to recover from its contractors, including us, any taxes, penalties, interest and fees that it must pay to the Brazilian tax authorities for our applicable portion of withholding taxes related to Petrobras’ charter agreements with its contractors. We intend to defend these matters vigorously; however, litigation is inherently unpredictable, and the ultimate outcome or effect of any claim, lawsuit or action cannot be predicted with certainty. As a result, there can be no assurance as to the ultimate outcome of any litigation matter. Any claims against us, whether meritorious or not, could cause us to incur significant costs and expenses and require significant amounts of management and operational time and resources. In the opinion of our management, no such pending or known threatened claims, actions or proceedings against us are expected to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

Personal Injury Claims

Under our insurance policies, our deductibles for marine liability insurance coverage with respect to personal injury claims not related to named windstorms in the U.S. Gulf of Mexico, which primarily result from Jones Act liability in the U.S. Gulf of Mexico, are $5.0 million for the first occurrence and vary in amounts ranging between $5.0 million and, if aggregate claims exceed certain thresholds, up to $100.0 million for each subsequent occurrence, depending on the nature, severity and frequency of claims that might arise during the policy year. Our deductibles for personal injury claims arising due to named windstorms in the U.S. Gulf of Mexico are $25.0 million for the first occurrence and vary in amounts ranging between $25.0 million and, if aggregate claims exceed certain thresholds, up to $100.0 million for each subsequent occurrence, depending on the nature, severity and frequency of claims that might arise during the policy year.

The Jones Act is a federal law that permits seamen to seek compensation for certain injuries during the course of their employment on a vessel and governs the liability of vessel operators and marine employers for the work-related injury or death of an employee. We engage outside consultants to assist us in estimating our aggregate liability for personal injury claims based on our historical losses and utilizing various actuarial models. We allocate a portion of the aggregate liability to “Accrued liabilities” based on an estimate of claims expected to be paid within the next twelve months with the residual recorded as “Other liabilities.” At March 31, 2020 our estimated liability for personal injury claims was $15.7 million, of which $6.2 million and $9.5 million were recorded in “Accrued liabilities” and “Other liabilities,” respectively, in our unaudited Condensed Consolidated Balance Sheets. At December 31, 2019 our estimated liability for personal injury claims was $17.4 million, of which $6.4 million and $11.0 million were recorded in “Accrued liabilities” and “Other liabilities,” respectively, in our Consolidated Balance Sheets. The eventual settlement or adjudication of these claims could differ materially from our estimated amounts due to uncertainties such as:

  Letters of Credit and Other

We were contingently liable as of March 31, 2020 in the aggregate amount of $32.9 million under certain customs, performance, tax and VAT bonds and letters of credit. Agreements relating to approximately $24.3 million

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of these tax and customs bonds can require collateral at any time, while the remaining agreements, aggregating $8.6 million, cannot require collateral except in events of default.  During the quarter ended March 31, 2020, we issued a $6.0 million financial letter of credit as collateral in support of our outstanding surety bonds. In April 2020, we made cash collateral deposits of $17.5 million with respect to other bonds and letters of credit.

11. Segments and Geographic Area Analysis

Although we provide contract drilling services with different types of offshore drilling rigs and also provide such services in many geographic locations, we have aggregated these operations into one reportable segment based on the similarity of economic characteristics due to the nature of the revenue-earning process as it relates to the offshore drilling industry over the operating lives of our drilling rigs.

Our drilling rigs are highly mobile and may be moved to other markets throughout the world in response to market conditions or customer needs. At March 31, 2020, our active drilling rigs were located offshore three countries in addition to the United States. Revenues by geographic area are presented by attributing revenues to the individual country where the services were performed.

The following tables provide information about disaggregated revenue by country (in thousands):

12. Income Tax 

On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The CARES Act allows a carryback of net operating losses generated in 2018, 2019 and 2020 to each of the five preceding taxable years.  As a result of the carryback, we recognized a tax benefit of $9.7 million due to a partial release of a previously recognized valuation allowance and tax rate change.

13. Subsequent Events

Senior Notes and Potential Event of Default

On April 16, 2020, we announced that we elected not to make the semiannual interest payment due in respect of our 5.70% Senior Notes due 2039 (the “Notes”), which was due on April 15, 2020.  Under the terms of the governing indenture, we have a 30-day grace period to make the payment.  Non-payment of the interest due on the

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due date was not an event of default but would become an event of default if the payment was not made within the 30-day grace period.  During the grace period, we are not permitted to borrow additional amounts under our Credit Agreement.

An event of default under the indenture governing the Notes would result in a cross-default under the Credit Agreement, whereupon the Notes and our borrowings under the Credit Agreement may then be subject to acceleration. The acceleration of the Notes or our borrowings under the Credit Agreement would result in a cross-default under the indentures governing our 3.45% Senior Notes due 2023, 7.875% Senior Notes due 2025 and 4.875% Senior Notes due 2043, whereupon such notes may then be subject to acceleration, subject to a 10-day cure period.

We also announced on April 16, 2020 that we have retained the services of Lazard Frères & Co. LLC as financial advisor and Paul, Weiss, Rifkind, Wharton & Garrison LLP as legal advisor to assist our Board of Directors and management team in analyzing and evaluating the various alternatives with respect to our capital structure.

Reduction in Force

In April 2020, we initiated a plan to reduce the number of employees in our world-wide organization in an effort to lower operating costs and restructure our business. As a result, we announced and communicated a reduction in personnel in our corporate offices, warehouse facilities and certain of our international shorebase locations. As a result, we expect to incur incremental costs of approximately $7.0 million during the remainder of 2020, primarily in the second quarter, for severance and outplacement services related to our former employees.

Contract Termination

In April 2020, we received a purported notice of termination by a subsidiary of Beach Energy Limited of its contract for the Ocean Onyx, which contract was scheduled to commence during the second quarter of 2020. We consider termination of the Ocean Onyx contract to be a triggering event for purposes of impairment testing, as the rig has no future contracts at this time, and we are currently preparing the rig for cold stacking. Based on our assumptions and analysis, we determined that the undiscounted probability-weighted cash flow for the Ocean Onyx was in excess of its carrying value. As a result, we concluded that the carrying value of the rig was not impaired.

Termination of Services Agreement

On April 24, 2020, our services agreement with Loews Corporation was terminated by mutual agreement.  Under the services agreement, Loews had previously provided certain administrative and technical services, such as internal auditing services and advice and assistance with respect to obtaining insurance. We are in the process of replacing certain of these functions with services obtained through other third-party providers.

Bankruptcy Filing

On April 26, 2020, the Debtors commenced the Chapter 11 Cases. The Chapter 11 Cases are jointly administered under the caption In re Diamond Offshore Drilling, Inc., et al, Case No. 20-32307.

The Debtors filed motions with the Bankruptcy Court seeking authorization to continue to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the United States Bankruptcy Code (the “Code”) and orders of the Bankruptcy Court. To ensure their ability to continue operating in the ordinary course of business, the Debtors have also filed with the Bankruptcy Court a variety of motions seeking “first day” relief, including authority to continue using their cash management system, pay employee wages and benefits and pay certain vendors and suppliers in the ordinary course of business (the “First Day Motions”).

On April 27, 2020 the Bankruptcy Court approved the First Day Motions, certain of which were approved on an interim basis.  A subsequent hearing to approve the First Day Motions granted on an interim basis is currently scheduled for May 27, 2020.     

Pursuant to the First Day Motions, and subject to certain terms and dollar limits included therein, the Debtors were authorized to continue to use their unrestricted cash on hand, as well as all cash generated from daily operations, which is being used to continue the Debtors’ operations without interruption during the course of their

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restructuring. Also pursuant to the First Day Motions, the Debtors received Bankruptcy Court authorization to, among other things and subject to the terms and conditions set forth in the applicable orders, pay certain pre-petition employee wages, salaries, health benefits and other employee obligations during their restructuring, pay certain claims relating to critical and other vendors, continue their cash management programs and insurance policies, as well as continue to honor their current customer programs. The Debtors are authorized under the Bankruptcy Code to pay post-petition expenses incurred in the ordinary course of business without seeking Bankruptcy Court approval. Until a plan of reorganization is approved and effective, the Debtors will continue to manage their properties and operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and the orders of the Bankruptcy Court.

The Debtors filed the Chapter 11 Cases with approximately $434.9 million of unrestricted cash, which they will use to fund operations in the ordinary course and administrative costs during the Chapter 11 Cases.

The filing of the Chapter 11 Cases constitutes an event of default that accelerated the Company’s obligations under the following debt instruments (collectively, the “Debt Instruments”):

The Debt Instruments provide that as a result of the filing of the Chapter 11 Cases, the principal and accrued interest due thereunder shall be immediately due and payable and have been presented as ”Current maturities of long-term debt” in our unaudited Condensed Consolidated Balance Sheet at March 31, 2020. However, any efforts to enforce such payment obligations under the Debt Instruments are automatically stayed as a result of the filing of the Chapter 11 Cases, and the creditors’ rights of enforcement in respect of the Debt Instruments are subject to the applicable provisions of the Bankruptcy Code.

Credit Agreement

As a result of the filing of the Chapter 11 Cases, we received notification on April 28, 2020 that the commitment under our Credit Agreement had been reduced from $950 million to approximately $442.0 million, representing the amount of borrowings outstanding plus the value of the letter of credit that had been issued under the Credit Agreement.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements (including the notes thereto) included in Item 1 of Part I of this report, Item 1A, “Risk Factors,” included in Part II of this report and our audited consolidated financial statements (including the notes thereto), Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Item 1A, “Risk Factors” included in our Annual Report on Form 10-K/A for the year ended December 31, 2019. References to “Diamond Offshore,” “we,” “us” or “our” mean Diamond Offshore Drilling, Inc., a Delaware corporation, and its subsidiaries.

We provide contract drilling services to the energy industry around the globe with a fleet of 15 floater rigs (four drillships and 11 semisubmersibles), of which two rigs are currently cold-stacked. As of the date of this report, we are making plans to cold stack an additional two rigs, the Ocean GreatWhite and the Ocean Onyx. The Ocean Confidence was sold in February 2020. See “– Market Overview.”

Bankruptcy Filing

On April 26, 2020, Diamond Offshore Drilling, Inc. (the “Company”) and certain of its direct and indirect subsidiaries (together with the Company, the “Debtors”) filed voluntary petitions (the “Chapter 11 Cases”) under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) with the United States Bankruptcy Court for the Southern District of Texas (the “Bankruptcy Court”).

See Note 13 “Subsequent Events” to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report and “– Liquidity and Capital Resources.”

Market Overview

The protracted industry downturn affecting the offshore contract drilling industry sustained a further significant set-back, commencing in mid-March 2020. The COVID-19 outbreak and actions taken by businesses and governments in response to it have precipitated a lockdown in many parts of the world, leading to a dramatic fall in oil demand and economic activity. In addition, amid the ongoing COVID-19 pandemic, the Organization of Petroleum Exporting Countries and other oil producing nations (“OPEC+”) were unable to reach an agreement on oil production quotas, at which point Saudi Arabia and Russia initiated efforts to aggressively increase production. The combination of these events created the unprecedented dual impact of a global oil demand decline coupled with the risk of a substantial increase in supply. While OPEC+ agreed in April to cut production, downward pressure on oil prices has remained and could continue for the foreseeable future. As a result of this, crude oil prices have fallen to approximately $15 per barrel as of the date of this report. Consequently, due to the low commodity price and uncertain global demand, many exploration and production companies, including some of our customers, have announced significant reductions in their 2020 capital spending programs.

Floater utilization, which was approximately 67% at the end of the first quarter, is expected to decrease significantly as some industry analysts report that contracting activity has come to a halt as new rig tenders are deferred or canceled. Additionally, some rigs are being released early from drilling programs or are having their contracts terminated, while other programs have been paused in response to the need for COVID-19 containment. Dayrates are also expected to decrease as customers seek lower rates on any new contracts awarded during these unprecedented times.

In April 2020, we received a purported notice of termination by a subsidiary of Beach Energy Limited (“Beach”) of its contract for the Ocean Onyx, which contract was scheduled to commence during the second quarter of 2020 and represents approximately $66 million of contract drilling backlog expected to have been earned in 2020 through 2021. We do not believe that Beach has a valid or lawful right to terminate the contract or that the purported notice of termination is effective, and we intend to enforce our rights under the contract. See “– Contract Drilling Backlog” for future commitments of our rigs during 2020 through 2023.

Global rig attrition is projected by industry analysts to increase as a market recovery is not expected in the near term.  During this time, drilling contractors may elect to forego upcoming special surveys of rigs rolling off contract

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with no future work, resulting in the cold stacking or ultimate retirement of a rig. Historically, the longer a drilling rig remains cold stacked, the cost of reactivation increases and the likelihood of reactivation decreases.  

During the first quarter of 2020, we recognized asset impairments aggregating $774.0 million to write down four of our semisubmersible rigs to their estimated fair values. If market fundamentals in the offshore oil and gas industry deteriorate further or a market recovery is further delayed, we may be required to recognize additional impairment charges in future periods. As of the date of this report, we have two cold-stacked semisubmersible rigs and are making plans to cold stack an additional two semisubmersible rigs.

Contract Drilling Backlog

Our contract drilling backlog, as presented below, includes only firm commitments (typically represented by signed contracts) and is calculated by multiplying the contracted operating dayrate by the firm contract period. Our calculation also assumes full utilization of our drilling equipment for the contract period (excluding scheduled shipyard and survey days); however, the amount of actual revenue earned and the actual periods during which revenues are earned will be different than the amounts and periods shown in the tables below due to various factors. Our utilization rates, which generally approach 92-98% during contracted periods, can be adversely impacted by downtime due to various operating factors including effects of COVID-19 and efforts to mitigate the spread of the virus, weather conditions and unscheduled repairs and maintenance. Contract drilling backlog excludes revenues for mobilization, demobilization, contract preparation and customer reimbursables. No revenue is generally earned during periods of downtime for regulatory surveys. Changes in our contract drilling backlog between periods are generally a function of the performance of work on term contracts, as well as the extension or modification of existing term contracts and the execution of additional contracts. In addition, under certain circumstances, our customers may seek to terminate or renegotiate our contracts, which could adversely affect our reported backlog.

The backlog information presented below does not, nor is it intended to, align with the disclosures related to revenue expected to be recognized in the future related to unsatisfied performance obligations, which are presented in Note 3 “Revenue from Contracts with Customers” to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report. Contract drilling backlog includes only future dayrate revenue as described above, while the disclosure in Note 3 excludes dayrate revenue and reflects expected future revenue for mobilization, demobilization and capital modifications to our rigs, which are related to non-distinct promises within our signed contracts. See “– Important Factors That May Impact Our Operating Results, Financial Condition or Cash Flows.”

The following table reflects our contract drilling backlog as of April 1, 2020 (based on information available at that time), January 1, 2020 (the date reported in our Annual Report on Form 10-K/A for the year ended December 31, 2019), and April 1, 2019 (the date reported in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2019) (in millions).

The following table reflects the amount of revenue related to our contract drilling backlog by year as of April 1, 2020 (in millions).

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The following table reflects the percentage of rig days committed by year as of April 1, 2020. The percentage of rig days committed is calculated as the ratio of total days committed under contracts, as well as scheduled shipyard, survey and mobilization days for all rigs in our fleet, to total available days (number of rigs, including cold-stacked rigs, multiplied by the number of days in a particular year).

Important Factors That May Impact Our Operating Results, Financial Condition or Cash Flows

Restructuring Costs. In April 2020, we initiated a plan to reduce the number of employees in our world-wide organization in an effort to lower operating costs and restructure our business. As a result, we expect to incur incremental costs of approximately $7.0 million during the remainder of 2020, primarily in the second quarter, for severance and outplacement services related to our former employees. In addition, we expect to incur incremental costs of approximately $55.0 million during the remainder of 2020 for attorneys, financial advisors and other professionals in connection with our Chapter 11 Cases.

Coronavirus Pandemic. The most immediate impacts and risks to our business as a result of the COVID-19 outbreak and efforts to mitigate the spread of the virus have been the safety of our personnel, as well as travel restrictions that have challenged the ability to move personnel, equipment and services to-and-from drilling rigs. In some instances, we have asked our rig crews to quarantine in-country before offshore rotations, as well as to remain in country after their offshore rotation, which has resulted in incremental costs for salaries and other employee-related expenses.  In addition, we have incurred additional costs to deep-clean facilities, purchase medical supplies and personal protective equipment. To date such costs have not been significant, but we cannot predict the future financial impact of our response to the pandemic in this fluid environment.

Regulatory Surveys and Planned Downtime. Our operating income is negatively impacted when we perform certain regulatory inspections, which we refer to as a special survey, that are due every five years for most of our rigs. The inspection interval for our North Sea rigs is two-and-one-half years. In addition, our operating income is negatively impacted by planned downtime for upgrades, contract preparation and mobilization of rigs; however, in some cases, we may be compensated for all or a portion of this downtime. During the remainder of 2020, we expect to spend approximately 245 days for upgrades, surveys, contract preparation and mobilization of rigs, which includes an aggregate of approximately 200 days for special surveys, upgrades and contract preparation for the Ocean BlackRhino and Ocean BlackLion and approximately 45 days for the mobilization of the Ocean Monarch and Ocean Onyx related to their upcoming contracts. We can provide no assurance as to the exact timing and/or duration of downtime associated with regulatory inspections, upgrades, contract preparation, rig mobilizations and other shipyard projects. See “ – Contract Drilling Backlog.”

Physical Damage and Marine Liability Insurance. We are self-insured for physical damage to rigs and equipment caused by named windstorms in the U.S. Gulf of Mexico, as defined by the relevant insurance policy. If a

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named windstorm in the U.S. Gulf of Mexico causes significant damage to our rigs or equipment, it could have a material adverse effect on our financial condition, results of operations and cash flows. Under our current insurance policy, we carry physical damage insurance for certain losses other than those caused by named windstorms in the U.S. Gulf of Mexico for which our deductible for physical damage is $25.0 million per occurrence. We do not typically retain loss-of-hire insurance policies to cover our rigs.

In addition, we carry marine liability insurance covering certain legal liabilities, including coverage for certain personal injury claims, and generally covering liabilities arising out of or relating to pollution and/or environmental risk. We believe that the policy limit for our marine liability insurance is within the range that is customary for companies of our size in the offshore drilling industry and is appropriate for our business. Under these policies our deductibles for marine liability coverage related to insurable events arising due to named windstorms in the U.S. Gulf of Mexico are $25.0 million for the first occurrence and vary in amounts ranging between $25.0 million and, if aggregate claims exceed certain thresholds, up to $100.0 million for each subsequent occurrence, depending on the nature, severity and frequency of claims that might arise during the policy year. Our deductibles for other marine liability coverage, including personal injury claims not related to named windstorms in the U.S. Gulf of Mexico, are $5.0 million for the first occurrence and vary in amounts ranging between $5.0 million and, if aggregate claims exceed certain thresholds, up to $100.0 million for each subsequent occurrence, depending on the nature, severity and frequency of claims that might arise during the policy year.

Critical Accounting Policies

Our significant accounting policies are discussed in Note 1 of our notes to the audited consolidated financial statements included in our Annual Report on Form 10-K/A for the year ended December 31, 2019.

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Results of Operations

Our operating results for contract drilling services are dependent on three primary metrics or key performance indicators: revenue-earning days, rig utilization and average daily revenue. The following table presents these three key performance indicators and other comparative data relating to our revenues and operating expenses for the three-month periods ended March 31, 2020 and 2019.

Three Months Ended March 31, 2020 and 2019

Net results for the first quarter of 2020 decreased $788.6 million compared to the first quarter of 2019, primarily due to an impairment charge of $774.0 million recognized in the first quarter of 2020 combined with lower margins from our contract drilling services. Contract drilling services contributed operating income of $33.4 million during the first quarter of 2020 compared to operating income of $59.3 million in the first quarter of 2019. Our results for the first quarter of 2020 were also negatively impacted by higher depreciation expense of $6.1 million, primarily due to capital

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expenditures made during 2019.  These unfavorable impacts to our net results were partially offset by a $3.5 million gain recognized for the sale of a drilling rig and incremental tax benefit of $11.8 million recognized during the first quarter of 2020.

Operating Results. Contract drilling revenue decreased $8.8 million during the first quarter of 2020 compared to the first quarter of 2019, primarily due to lower average daily revenue earned ($28.0 million), partially offset by the effect of 61 incremental revenue-earning days ($19.1 million).  The decrease in average daily revenue is primarily due to the completion of a long-term contract for the Ocean BlackHornet in July 2019, which was at a significantly higher dayrate than the rig’s current contract, partially offset by $8.8 million of revenue recognized during the first quarter of 2020 related to the reimbursement of withholding taxes related to one of our rigs in Brazil. Revenue-earning days increased, compared to the first quarter of 2019, primarily due to incremental revenue-earning days for the Ocean Endeavor (90 days), which was reactivated for a new contract that commenced during the second quarter of 2019, and less downtime for planned shipyard projects and mobilization of rigs (77 days), partially offset by the unfavorable impact of incremental non-productive days (58 days).

Contract drilling expense, excluding depreciation, increased $17.1 million during the first quarter of 2020 compared to the first quarter of 2019, primarily due to higher costs for repairs and maintenance ($7.6 million), labor and personnel ($7.3 million), primarily related to the newly reactivated Ocean Endeavor and Ocean Onyx, equipment rental ($2.2 million) and inspections ($2.2 million), partially offset by a net reduction in other rig costs ($2.2 million).  

Impairment of Assets. During the first quarter of 2020, we evaluated five of our drilling rigs that had indicators of impairment and determined that the carrying values of four of the rigs were impaired.  As a result, we recognized an aggregate impairment charge of $774.0 million during the quarter. See Notes 4 and 7 to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report.

Gain (Loss) on Disposition of Assets.  During the first quarter of 2020, we sold the Ocean Confidence, a previously impaired semisubmersible rig that was cold stacked in 2015, for a net pre-tax gain of $3.5 million.  In the first quarter of 2019, we recognized a $4.3 million loss on the sale of certain scrapped rig equipment.

Income Tax Benefit. On March 27, 2020, the President of the United States signed into law the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The CARES Act allows a carryback of net operating losses generated in 2018, 2019 and 2020 to each of the five preceding taxable years.  As a result of the carryback, we recognized a tax benefit of $9.7 million due to a partial release of a previously recognized valuation allowance and tax rate change.

We recorded a net income tax benefit of $15.9 million (1.8% effective tax rate) for the first quarter of 2020, compared to an income tax benefit of $4.1 million (5.3% effective tax rate) for the same quarter of 2019. The decrease in the effective tax rate was primarily due to an increase in valuation allowance for tax attributes that are not likely to be realized and our mix of domestic and international pre-tax profits and losses, partially offset by the benefit recognized from the CARES Act.  

Liquidity and Capital Resources

In April 2020, as a result of continued challenges in the offshore drilling industry and the current uncertainty in the global markets resulting from, among other things, the COVID-19 outbreak and a significant decline in oil prices, we commenced the Chapter 11 Cases described in Note 13 “Subsequent Events” to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report and “– Bankruptcy Filing”.

Although we anticipate that the Chapter 11 Cases will help address our liquidity concerns, uncertainty remains over the Bankruptcy Court's approval of a plan of reorganization, and therefore substantial doubt exists over our ability to continue as a going concern at this time.  Financial information in this report has been prepared on the basis that we will continue as a going concern, which presumes that we will be able to realize our assets and discharge our liabilities in the normal course of business as they come due. Financial information in this report does not reflect the adjustments to the carrying values of assets and liabilities and the reported expenses and balance sheet classifications that would be necessary if we were unable to realize our assets and settle our liabilities as a going concern in the normal course of operations. Such adjustments could be material.  Our long-term liquidity requirements, the adequacy of capital resources and ability to continue as a going concern are difficult to predict at this time and ultimately cannot be determined until a Chapter 11 plan has been confirmed, if at all, by the

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Bankruptcy Court. If our future sources of liquidity are insufficient, we could face substantial liquidity constraints and be unable to continue as a going concern and will likely be required to significantly reduce, delay or eliminate capital expenditures, implement further cost reductions, or seek other financing alternatives.

We have historically relied on our cash flows from operations and cash reserves to meet our liquidity needs, which primarily include the servicing of our debt repayments and interest payments, as well as funding our working capital requirements and capital expenditures. As of April 1, 2020, our contractual backlog was $1.4 billion, of which $0.5 billion is expected to be realized during the remaining nine months of 2020. Also, during the fourth quarter of 2020, we expect to receive a $25.0 million payment from a customer for a gross margin commitment pursuant to terms of an existing contract if the commitment is not satisfied by the signing of a new contract commencing in 2020. At March 31, 2020, we had cash available for current operations of $499.1 million.

Sources and Uses of Cash

During the first quarter of 2020, net cash usage for operating activities and capital expenditures was $22.8 million and $74.9 million, respectively. Our primary sources of cash during the same period were $436.0 million in borrowings under our credit facility and proceeds from the sale of the Ocean Confidence of $4.6 million.

Cash Flow from Operations. Cash flow from operations for the first quarter of 2020 decreased $25.7 million compared to the first quarter of 2019, primarily due to higher net cash expenditures related to contract drilling, shorebase support and general and administrative costs ($44.2 million). The incremental cash used for operations during the first quarter of 2020 was partially offset by an increase in cash receipts for contract drilling services ($20.1 million) and lower foreign income tax payments, net of refunds ($1.6 million).

Upgrades and Other Capital Expenditures. As of the date of this report, we expect cash capital expenditures for the remaining nine months of 2020 to be approximately $115 million to $135 million for a total spend of approximately $190 million to $210 million in 2020.  Planned spending for the remainder of 2020 primarily consists of equipment upgrades for the Ocean BlackRhino and Ocean BlackLion.  At March 31, 2020, we had no significant purchase obligations, except for those related to our direct rig operations, which arise during the normal course of business.

Other Obligations. As of March 31, 2020, the total net unrecognized tax benefits related to uncertain tax positions was $245.6 million. Due to the high degree of uncertainty regarding the timing of future cash outflows associated with the liabilities recognized in these balances, we are unable to make reasonably reliable estimates of the period of cash settlement with the respective taxing authorities.

See Note 9 “Credit Agreements and Credit Ratings” to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report for a discussion of the recent downgrades of our credit ratings.

Other Commercial Commitments - Letters of Credit

See Note 10 “Commitments and Contingencies” to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report for a discussion of our other commercial commitments.

Off-Balance Sheet Arrangements

At March 31, 2020 and December 31, 2019, we had no off-balance sheet debt or other off-balance sheet arrangements.

New Accounting Pronouncements

See Note 1 “General Information – Recently Adopted Accounting Pronouncements” to our unaudited condensed consolidated financial statements included in Item 1 of Part I of this report for a discussion of recently issued accounting pronouncements.

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Forward-Looking Statements

We or our representatives may, from time to time, either in this report, in periodic press releases or otherwise, make or incorporate by reference certain written or oral statements that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements include, without limitation, any statement that may project, indicate or imply future results, events, performance or achievements, and may contain or be identified by the words “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,” “believe,” “should,” “could,” “would,” “may,” “might,” “will,” “will be,” “will continue,” “will likely result,” “project,” “forecast,” “budget” and similar expressions. In addition, any statement concerning future financial performance (including, without limitation, future revenues, earnings or growth rates), ongoing business strategies or prospects, and possible actions taken by or against us, which may be provided by management, are also forward-looking statements as so defined. Statements made by us in this report that contain forward-looking statements may include, but are not limited to, information concerning our possible or assumed future results of operations and statements about the following subjects: